Congressional Reforms to Federal Mortgage Providers Would Affect Interest Rates, Loans

CITY HOMES on the market, such as this one pictured here, may have trouble finding buyers if federal loan providers Fannie Mae and Freddie Mac are reformed in Congress. (Photo: News-Press)

Homeowners and prospective homebuyers may come up against a new obstacle when paying or taking on a mortgage for their desired property if Congressional reforms to government-sponsored enterprises are made official in the near future.

According to new research by Zillow, Congress is considering changes to the lending procedures used by government-sponsored enterprises, or GSEs, Fannie Mae and Freddie Mac in order to reduce the risk to taxpayers if there was another housing market crisis. Continuing with Zillow’s analysis, the purpose of the two GSEs are to keep interest rates on long-term fixed-rate mortgages low, and as a result, making housing more affordable for the masses. If Congress were to pass some comprehensive changes, Americans could be facing shorter loan durations or higher interest rates, or both, depending on what kind of housing market they’re currently residing in.

“Fannie Mae and Freddie Mac continue to play a key role in the secondary mortgage market by guaranteeing loans for investors to purchase, which is crucial in providing capital for mortgage lending,” Adam DeSanctis, an economic issues media manager for the National Association of Realtors (NAR), told the News-Press. “As for proposed changes in Congress to Fannie Mae and Freddie Mac, NAR believes that any change must involve some government presence to ensure a continual flow of capital at all times and in all markets. However, any proposal that raises the costs of getting a mortgage ultimately places financial strain on many would-be homebuyers and would have a negative impact on the housing market.”

Fannie Mae and Freddie Mac are seen as a necessary arbiter when it comes to providing lower and middle income populations with an opportunity to purchase a home. However, the two GSE’s responsibility in the last housing crisis, which was a major factor in the Great Recession, and the now decade-long conservatorship by the federal government have turned Congressional opinion around.

Per, before the housing crisis Fannie Mae and Freddie Mac enjoyed a monopoly on the secondary mortgage market — a very large and liquid market where home loans and servicing rights are bought and sold between lenders and investors.

When home prices fell and mortgages began to default en masse, the Federal Housing Finance Agency (FHFA) declared that the two GSEs would eventually be insolvent, causing the firms to take on another $200 billion in debt in an effort to stabilize the economy. From then on, Fannie Mae and Freddie Mac have been under their current state of conservatorship.

James C. Miller III, a former Office and Management Budget director under President Ronald Reagan, wrote in the Washington Times last fall that the GSEs support $5 trillion in home loans that are funded primarily through credit and lack sufficient cash or capital to reinforce the firms if another wave of defaults were to occur.

Miller makes an appealing case that both of the firms should undergo some serious reforms, the least being an investigation into how Fannie Mae and Freddie Mac could provide safer, yet stricter lending practices that wouldn’t over extend the U.S.’s credit institutions.

But as it stands now, it appears homeowners and future homebuyers will either have to bear the brunt of higher interest rates and shorter loan durations if the reforms were to pass, or run the risk of feeding into — worst case scenario — a second housing crisis if they don’t.